Most consumers don’t know it, but there’s a hidden fee that raises the price of almost everything they buy.
Every time a shopper swipes a credit card, the bank charges the merchant for processing the transaction. The “swipe fee” doesn’t sound like much at an average of only 2 percent, but adds up to more than $50 billion a year that gets added to the price of merchandise – $1 on every $50 purchase or more than $400 per household every year. While the fees are charged by banks, the amount is dictated by Visa and MasterCard, the credit card giants that dominate the U.S. card market. (Much-smaller competitors American Express and Discover have their own system.)
Under the new rules, swipe fees on European credit cards will be limited to 0.3 percent of each transaction, with swipe fees on debit cards limited to 0.2 percent.
“This legislation is good for consumers, good for business, and good for Europe,” said the European commissioner in charge of competition policy, Margrethe Vestager. “It will lead to lower prices and visibility of costs for consumers.”
“It reduces a tax levied on business by banks in the form of interchange fees, and releases the brakes that have so far held back innovation,” Vestager said.
Over the past 15 years, the fees have become most American merchants’ fastest-growing expense and their second- or third-highest cost behind payroll and health care. And since they are passed on to consumers, Americans pay more in swipe fees than the rest of the world combined.
Ultimately, these costs create a huge drag on consumer spending. The EU estimates that its new policy will save merchants and consumers more than $6 billion annually. The benefits of making swipe fees more competitive in the United States would be far greater.
It is testimony to perseverance that things have changed in Europe – it took more than a decade of fighting against lawsuits and lobbying from Visa and MasterCard to win the changes.
Here in the United States, Congress took the first step toward reform five years ago when it agreed to cap swipe fees on debit cards. But lobbying by the banks left the cap at about 25 cents – twice as high as initially recommended by the Federal Reserve and five times banks’ actual cost of processing debit transactions. And Congress has yet to address credit card swipe fees.
The card companies complain that regulations like those in Europe are unfair and bad for their industry. If that’s the case, why is Visa buying its European subsidiary for up to $23 billion? The reason is simple: the new EU limitations still leave room for plenty of profits and growth. They will still reap 10 to 15 cents on a transaction that costs them less than a nickel to process.
The new EU rules are a win all the way around – merchants and consumers save, the “brakes” on the economy get lifted, and the credit card companies and banks continue to prosper. It’s time for U.S. policymakers to follow that example so American merchants and consumers can stop paying the bulk of the world’s swipe fees.
Duncan is chairman of the Merchants Payments Coalition and senior vice president and general counsel at the National Retail Federation.